Fundamentals Always Win!

This weekend, a long-time reader – and silver holder – wrote the following…

If silver is so precious, and the ‘artificial’ price so low, than how come it’s not out of circulation yet? How come silver is available when you want it? I call it BS. If I’m wrong, and I may be wrong, please explain why.

This reader has been a big fan, so it’s disheartening to hear this as he, as well as anyone, knows the Miles Franklin Blog’s popularity emanates from its adherence to truth. And in the case of PM prices, the truth is that prices have been artificially suppressed since the bull market commenced in 1999 and frankly, the past 54 years, going back to the 1961-68 London Gold Pool. Moreover, since the global banking system irreparably broke in 2008 – particularly, after Central bank QE programs were ratcheted higher in 2011; such suppression went berserk, as TPTB realized a PM buying panic was not only inevitable, but could commence any second, ending their 43-year reign of financial despotism.

More importantly, I am only speaking of covert price fixing – as until the gold standard’s abandonment in the early 1970s, PM prices were overtly suppressed for seven centuries. Per below, not only did the U.S. government fix the price of gold from 1791-1973 but before that, Western gold prices were set by the British government from 1257-1790 (when it, not the U.S., held the world’s “reserve currency”). And thus, to those following commentators, technicians, and sundry “analysts” forecasting prices without acknowledging the biggest pink elephant in the history of pink elephants, we hope your due diligence process will be rectified before its too late. Much less, those readers that think gold and silver are “investments” to be traded as opposed to what they really represent – i.e., the best historical means of preserving net worth, and passing it to subsequent generations.

Regarding price suppression generally, this weekend’s Audio Blog focused on the single most shocking data point I have come across, demonstrating just how far TPTB have taken their suicidal manipulations. In reading that the benchmark Japanese government 10-year bond didn’t trade for 36 hours last week, it became crystal clear that there are zero buyers left, other than the BOJ’s “Abenomics” program. Frankly, the only difference between what is going on in Japan and the U.S. is the covert Federal Reserve QE we provedearlier this year; as evidenced by the transparent recruitment of the ECB to purchase Treasuries, in order to offset massive foreign Treasury selling – under the cover of Belgium. Gee, what a coincidence that the ECB’s master, the EU, is headquartered in Brussels!

As for Precious Metals specifically, I’m not sure we can be more specific of howprices are suppressed; and over the years, essentially everything we have postulated has come true. David Schectman was publishing the Miles Franklin Report before the PM bull market even started, whilst Bill Holter and I were doing so shortly thereafter. And oh yeah, in all cases, our commentary was free. Importantly, amidst the myriad issues we’ve discussed, one of the most irrefutable is that freely-traded PM prices cannot trade below the cost of production for long – without destroying the mining industry, yielding collapsing output and inevitably, product shortages.

Since the global banking system broke in 2008, we have seen numerous PM product shortages – particularly in silver, which right now, has never been tighter for those seeking to buy significant amounts. This is why, despite “plunging” paper prices, 2013 U.S. Mint Silver Eagle demand – and imports into India, the world’s largest silver consumer – achieved record highs; while this year, these records are on pace to be shattered, prompting the U.S. Mint to ration supply on a weekly basis. Think about it, in 2008, global silver supply ran out for four months, prompting nearly 100% physical premiums – and yet, 2014 demand could conceivably triple 2008’s level!

To wit, Steve St. Angelo wrote yet another brilliant article this past weekend, describing how the silver mining industry is collapsing; as the lethal combination of enormous losses, plunging capital investment, surging input costs, and imploding ore grades is setting the stage for an all out production collapse – as is already the case in the U.S., where overall silver production is down more than 50% in the past 25 years.

SRS Rocco Report

Even more damning is this weekend’s news that Barrick Gold and Newmont Mining are in late stage merger talks. The fact that the world’s two largest gold miners – combined, holding a massive 13% market share – are even considering merging should tell you just how bad the production outlook has become. Frankly, it reminds me a lot of my oil industry days specifically, early 1999. Back then, despite the presence of a powerful Cartel mandated with supporting prices, oil succumbed to a “perfect storm” of temporary factors, pushing it below $10/bbl. and prompting the Economist to infamously call for permanent single-digit prices. Prices were clearly below the cost of production, causing hundreds of small E&P companies to go bankrupt and catalyzing a rash of industry-saving mergers such as BP/Amoco/Arco, Exxon/Mobil, Chevron/Texaco, Total/Petrofina/Elf, and Conoco/Phillips. Prices rebounded sharply by the end of 1999, but capex budgets were slashed for years to come, as said “Supermajors” realized the “low hanging fruit” was forever gone. Hence the commencement of high-cost exploration in deep water and harsh environments, exponentially increasing production costs and ultimately, consumer energy prices. Combine such factors with the accelerated currency debasement of nearly all global central banks; and despite the worst global economic environment of our lifetimes, WTI oil prices are nearly $105/bbl.

Now, fast forward to today – when the gold and silver mining industry has been placed in an even more untenable situation; as not only are the same cost pressures prevalent, but a price suppressing Cartel is omnipresent. Unquestionably, silver prices must exceed $25/oz. for the industry to even break even on a net income basis – and likely, $30/oz. to enable it to replace – or expand – reserves. And as for gold miners, which cumulatively lost $35 billion in 2013, or nearly a quarter of their market capitalization, said “sustaining price” is closer to $1,500/oz. – per the CEO of the world’s fourth largest gold miner, Goldfields. As for global PM inventories, I’ll leave it to you to believe exactly what numbers are correct given how most of the entities providing such data are the “bad guys.” However, no matter where you look, the mosaic provided by the cumulative data purports a dire supply situation.

If you don’t believe me, ask the German government, who repatriated a whopping five tonnes of gold in the first year after requesting the NY Fed to send 300 tonnes back or better yet, the telling state of today’sgold forward, or GOFO, rates.

With respect to the frequency of a negative GOFO: From January 1, 1989 – July 7, 2013, there were only seven days in which a negative GOFO was observed. But since 7/7/2103, GOFO has been negative more than 55% of the time. In other words, the market for physical gold that can be delivered into the custody of the buyer has never been tighter.

And thus, we ask you given record global gold and silver demand, an historically bleak production outlook, and the most bullish fundamentals of our lifetimes; do you believe we are “fabricating” about our views on gold and silver prices? And better yet, would we – i.e., David Schectman, Andy Schectman, Bill Holter, and myself – be holding substantial portions of our personal net worths in PMs if we were? Remember, the fundamentals always win – particularly in the case of misguided, power-hungry governments trying to usurp the laws of Economic Mother Nature via money printing, market manipulation, and propaganda!

As for today’s “action,” the Cartel attacks of the past week are as vicious, and blatant, as we have ever seen; amidst overwhelming evidence that the Ukrainian crisis is decidedly NOT “de-escalating,” and U.S. economic data – including yet another miserable earnings season – depicting, per John Williams, continued economic deterioration.

In Japan, not only did Consumer Confidence plunge to 32-month lows, but 90% of survey participants anticipate higher prices in the next 12-months; i.e., the highest inflation expectations in the survey’s ten-year history. Better yet, this morning, it was reported that Japan’s trade deficit expanded for the 36th straight month, which must be (facetious) what caused PMs to instantaneously crash, in ultra-thin Sunday night trading. Yes, this is what occurred whilst Europeans slept and Americans sat at their Easter dinner tables; in gold’s case – what a coincidence – just as it tried to cross the Cartel’s current “line in the sand” at $1,300/oz.

This morning, with oil surging toward $105/bbl.; most emerging market currencies getting crushed (whilst the “dollar index” remains well below 80), Treasury yields again plunging, and Europe markets closed, as Yahoo! Finance’s top story reads “Asian stocks subdued in holiday thin trade, as Ukraine tensions mount”; the overnight PM losses were sustained by yet another “Cartel Herald” attack at exactly the 10:00 AM EST physical market close – using prototypical DLITG, or “Don’t Let it Turn Green” algorithms; and in the case of silver, yet another ubiquitous 2% plunge…

…whilst the PPT, as always, used its usual DLITR, or “Don’t Let it Turn Red” algos to assure the opposite again, in “holiday-thin trade,” as described by Zero Hedge to a tee.

Hopefully, this piece helps you to understand the unsustainability of Precious Metals prices so far below the cost of production – a la oil prices circa 1999. Not to mention, in the context of a doomed-to-fail suppression scheme – as the fundamentals always win!

6 Comments

Sandman
on April 21, 2014 at 5:20 pm

This article just makes me want to go out and buy some more silver 🙂

Thanks, Andy!

Scott Wolf
on April 21, 2014 at 8:30 pm

Andy,

Always a pleasure.I’ve commented on your articles many times.This article,in particular, is brilliant. I have a few questions:

1)Like oil, aren’t we in peak gold and silver? And hasn’t the USGS done extensive studies concluding that mineable gold and silver could be exhausted within a couple of generations?

2)Is April 24 the day that the Chinese govt. will announce its updated gold holdings?

3)Do you think we are moving toward the IMF SDRs like Rickards says? It’s clear that central banks will not stop printing money-guaranteeing a complete collapse of all paper assets. I know your feelings about Jim,but it’s hard to see this current economic system surviving much longer.

If the govt and fed are this good at manipulating all the financial markets and the general public is blind to this activity it makes me wonder what else they are manipulating behind the scenes. I know this blog is about the truth and not conspiracy but there is no chance they are stopping with financials. Is it possible our whole view of the world is distorted and a lie? I’m seeing things differently after reading this blog daily because what I see going on everyday is not what my coworkers or family and friends see. They believe we have free markets and economy is turning around. It’s all getting scary to me. Thanks for the insight Andy

Red
on April 22, 2014 at 12:45 pm

Since I hear so often that silver is used in so many industrial business and that there is no substitute, why aren’t the industrial companies that use silver buy all of the available silver possible at todays prices thereby causing silver to sky rocket in price?

Nick
on April 22, 2014 at 1:44 pm

If silver is so precious, and the ‘artificial’ price so low, than how come it’s not out of circulation yet? How come silver is available when you want it? I call it BS. If I’m wrong, and I may be wrong, please explain why.

Because the demand for physical precious metals in North America only comes from a very small percentage of the population that realizes that Asia is working to re-monetize gold.

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